P09-Inspection
Objective Form:
09.1 Buyer shall have the right, beginning upon the date hereof
and ending at 12:00 p.m. on _________, to examine the premises
and to conduct such engineering, geological and environmental
studies and tests, including soil tests and borings, as are
reasonable to determine the suitability of the Premises for
Buyer's use and development of the Premises as a ______________.
If, based upon the results of such tests, the Premises are
unsuitable for the Buyer's use as a __________________________
and within said __________ day period Buyer delivers to Seller
written notice that the Premises are unsuitable for such use,
this agreement shall terminate and all funds deposited or paid by
Buyer shall be returned to Buyer. Buyer agrees that it shall use
reasonable standards in determining the suitability of the
Premises for its use.
09.2 Buyer shall pay for all of the tests, examinations, and
studies as it may conduct under the previous paragraph, the cost
of which shall be paid iYn full, prior to any termination of this
agreement.
09.3 Buyer agrees that, in the event it terminates this
agreement under the previous paragraph, it will, within _______
days following termination, return the Premises to its original
condition prior to such examinations, tests and studies. Buyer
further agrees to indemnify, defend and hold Seller harmless of
and from all manner of injuries to persons or property, suits,
causes of action, claims (including mechanics' or materialmen's
liens) demands, damages, costs, expenses (including reasonable
attorney fees and costs of litigation), injunctions, warrants,
penalties and proceedings alleged or claimed against or paid by
Seller relating to or the result of Buyer's or its agents',
employee's and contractors' examinations, tests and studies.
Comment
Where a company purchases land it commonly does so with an
intended use in mind as opposed to speculative investment. Where
such is the case, the Buyer has a legitimate need to ascertain
whether the land is suitable in its physical and intrinsic
character (i.e. soil composition, bedrock level, drainage, slope,
geological structuring, the environmental quality of the land and
its location in respect of the surrounding areas) for Buyer's
intended use. Inspection provisions are the contractual vehicle
for a Buyer to purchase land at a predetermined price and date
and, yet, retain the opportunity of determining whether the land
is suitable for its uses, before becoming committed to complete
the purchase. Although provisions dealing with the condition of
improved property may be found in or in connection with an
inspection provision, the intention is to separate those
provisions (See Section 10 on Condition)
Thus, the inspection provision is intended to deal only with
raw, unimproved or substantially underimproved land where the
existing structures must be removed for the Buyer's intended
uses.
At issue in the negotiation of an inspection provision are
the following:
(a) Should the Buyer's determination of suitability be
at its sole discretion or based upon a measurable
standard?
(b) What standards of suitability should aply?
(c) What tests may the Buyer conduct without destroy-
ing the physical integrity of the property?
(d) In the event of damage to the property or persons
either resulting from such tests while Buyer is in
control of the property, who bears the risk of loss?
(e) Who pays for the inspection?
(f) In the event that the Buyer determines the pro-
perty to be unsuitable, should the down payment, or
any portion thereof, be returned to it?
Objective Format
The objective format allows the Buyer to conduct all tests
and examinations reasonably necessary to determine whether the
property is suitable for a particular use which is disclosed to
the Seller. Accordingly, so long as the tests are reasonably
necessary in determining suitability, they may be conducted. It
is unnecessary for the Buyer to predetermine the precise tests to
be conducted, the nature of which may reasonably change during
the course of the inspection, particularly if unanticipated
results occur or facts are uncovered. The Buyer is not limited
in its judgment in determining whether the property is suitable,
other than it must (i) base that judgment on the results of
tests, examinations or studies and (ii) exercise a reasonable
judgment in making that determination. This is intended to allow
the Buyer much discretion while protecting the Seller from a
Buyer using the "Inspection Provision" to back out of a deal on
grounds other than an objective determination that the property
is unsuitable. Thus, except in instances of true "bad faith" or
"unreasonableness" the Buyer may be released from its obligation
to purchase and have its deposit returned if it is not
satisfactorily assured of the property's usefulness.
TYhis format, further, places the burden upon the Buyer (which
is conducting the tests), to notify the Seller in the event that
it has judged the property unsuitable. This takes away the
guesswork and the possibility of a mistaken waiver by the Seller,
if the Buyer does not timely notify Seller of its decision.
Alternatives:
The Buyer's greatest latitude is commonly in an option where,
for good reason or no reason at all, it may refuse to purchase
the property, with or without an inspection. In a "pure" option
it is actually unnecessary to deal with the Buyer's right of
inspection, other than to describe its right to come upon the
property in order to do so.
"9.1 During the option period, Buyer, its agent, employees
and contractors, shall have the right to enter upon the
premises in order to conduct such engineering, geologi-
cal and environmental studies and tests, including soil
tests and borings, as Buyer requires to determine the
suitability of the Premises for its uses, provided,
however, that the tests and studies do not cause such
irreparable damage to the Premises, that Buyer is un-
able to correct or cure them under the subsequent sec-
tion hereof."
The concern is only for the nature of the tests to be
conducted and their effect on the physical property and not the
results or their effect upon the Buyer's judgment whether or not
to complete the sale. It is recognized that the Buyer may refuse
to exercise the option, at his discretion, regardless of the
reason or cause. For this right, however, the Buyer pays the
price of the option, which is thence forfeited to the Seller.
In certain instances, where the Buyer's negotiating position is
particularly strong, the Buyer may have a similarly unemcumbered right
to terminate for unsuitability, without forfeiture of an option fee.
"9.1 Buyer shall have the right, beginning upon the date
hereof and ending at 12:00 p.m. on ___________, to
examine the Premises and to conduct such engineering,
geological and environmental studies and tests, in-
cluding soil tests and borings, as the Buyer desires
to determine the suitability of the Premises for its
uses. If, within said ______________ period Buyer
delivers to Seller written notice that the premises are
unsuitable, this agreement shall terminate and all funds
deposited or paid by Buyer shall be repaid to Buyer."
Hence, for all practical purposes, the Buyer is free to
terminate the agreement for any or no reason, and, absent obvious
bad faith (i.e. failing to make any inspection), will not lose
its deposit. Even if there is obvious bad faith (i.e. failing to
even inspect the property while purchasing an adjacent property
at a lower price), it is not clear that a court would hold that
the deposit is forfeited. Finally, in that "bad faith" is
extremely difficult to prove, the Buyer's right to terminate is
practically assured. Thus, the Buyer receives virtually all of
the benefits of an option (unfettered discretion in judging
suitability) without the forfeiture of an option fee.
This is the type of provision often sought (but seldom
obtained) by speculators and those Buyers which are unwilling to
disclose the nature or scope of their intended uses. In the
latter instance, the Buyer may desire complete discretion in
terminating the purchase if the property proves unsuitable but,
for business reasons, may not wish to reveal its intended uses.
Such is the case where a company is purchasing numerous and
separate tracts of land in a new facility location or where the
Seller is unaware of the value of its land for the Buyer's
special needs. It may also be the case where the Buyer's
intended use of the Premises is one to which the Seller or
community may object. In such instances the "pure" option or the
equivalent right to Yterminate for an undefined standard of
suit-ability, as set forth in the above provision, is usually
found.
In other instances the Buyer is not reticent to unveil its
intended use to the Seller, but may not wish to be limited to
suitability for a particular use. This may be accommodated
simply by eliminating the language defining use from the
objective form:
"to conduct such engineering, geological and environ-
mental studies and tests...as are reasonable to deter-
mine the suitability of the Premises for Buyers uses.
If, based upon the results of such tests, the Premises
are unsuitable for Buyer's uses..."
The Buyer may refuse to be limited in its discretion as to
the suitability of the Premises, by a standard of reasonableness
which may be inconsistent with its requirements. Where a Buyer
is to make major capital investments on a tract of land it may be
unwilling to risk its money on a standard of reasonableness that
may ultimately be determined by an arbitrator, or worse yet--a
jury of laymen. One alternative could be to substitute a
standard of "good faith" for one of "reasonableness." Good
faith, in legal sense, ordinarily implies a standard of fairness
geared more to the Buyer's actual circumstances than to the
objective "reasonable" man.
"Buyer agrees that it shall use good faith in de-
termining the suitability of the Premises for its
uses."
From the Seller's perspective, it would obviously wish to
either eliminate the Inspection provision or to limit the Buyer's
discretion as to suitability for use. One method of accom-
plishing this is to list, with specificity, the tests to be
conducted and the results which will be acceptable.
"Buyer shall have the right, beginning upon the date
hereof and ending at 12:00 p.m. on ____________, to
conduct those examinations and tests listed on schedule
______________________. Only if the results of those
tests do not meet the corresponding standards set forth
in Schedule A may the Buyer terminate this agreement by
delivering written notice thereof to Seller. Upon such
termination all funds deposited by Seller shall be re-
turned to it."
The obvious problem with this provision is the difficulty in
defining what test results and standards are acceptable and,
therefore, it is rare to see such a provision.
Paragraphs 09.2 and 09.3
Objective Form
Generally speaking, the objective format follows the idiom,
"He who asks for it, pays for it." Where the Buyer desires
suitability studies it pays not only for the actual cost but, as
well, for any damages which may be caused by the studies.
Alternatives
Many a Buyer has successfully negotiated for the Seller to
pay for all or some portion of the cost of suitability studies.
Where there is the known possibility of a problem condition upon
the property and particularly where the Seller is unwilling to
give a representation or warranty as to that condition, a Buyer
might well require the Seller to help pay for the suitability
study. Even where the Seller does warrant property conditions, a
strong Buyer can occasionally require total or partial funding by
the seller.
As to paragraph 09.3 (Indemnification) the Buyer can either
give it totally, split the risk or refuse to grant it at all.
Generally, although not in all instances, the division of
risk is identical to the division of cost.
Differences in the language of indemnification provisions
generally are more the reflection of the drafting attorney's
style and thoroughness than actual differences in the intent of
the parties. Ordinarily, once a party agrees to indemnify
another, that party intends to indemnify against all risks to the
other directly arising from his actions (although, at trial, the
intended coverage of the indemnification seems to shrink in
correlation with the degree aYnd cost of liability). Areas of
legitimate concern, which should be specifically addressed by the
parties, are whether the indemnification covers:
1) Bodily injury
(a) just to the indemnitee
(b) to others, including employees, agents,
and contractors of either or both the
indemnitee and the indemnitor
(c) to everyone
2) Damage to the land and other property
(a) the ordinary result of the tests
(b) damages that result from an unusual
or unexpected condition which the
indemnitee may or may not have known about.
3) All costs and expenses
(a) including attorney fees and court costs
(b) Loss of business or opportunity
(c) those which were an indirect or unex-
pected result of the tests.
4) Actions brought by governmental entities
(a) fines
(b) business losses resulting therefrom
(c) costs of defense.
The range of possible indemnification provisions is endless,
depending upon the inclusion or exclusion of all or some of the
above items.
Obviously, the list of possible excluded items is lengthy and
not all variables may be listed here. It is significant,
however, to note the importance of precision in the description
of risks which are not covered and the drafting of those
descriptions:
"The foregoing notwithstanding the Buyer shall not
indemnify against those items which (i) are not the
direct result of its activities upon the land (ii)
were the direct result of a condition of the land not
created by Buyer's activities (iii) are the result of
governmental action to restrain the use of the land
for the Buyer's intended purposes or restrain Buyer's
activities upon the land.
Other Provisions
Other provisions included within the sample of members'
agreements are as follows:
"Buyer shall in going upon the property, exercise due
regard for Seller's privacy."
"Buyer shall obtain, from its tenants, a right for
Buyer to come upon the property."
"If, prior to the closing, any crops planted on the
Premises are damaged by reason of the activities of the
Buyer, or its agents, representatives, or independent
contractors, pursuant to this section, Buyer shall pay
Sellers for such crops; the price shall be determined
by multiplying the estimated yield by the current
market price of such crops and subtracting therefrom
the estimated cost of cultivating and harvesting said
crops."
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©1997 Conway Data, Inc. All rights reserved. Data is from many sources and not warranted to be accurate or current.